IEA’s annual report paints grim picture of our energy future

Rising costs, shifting reserves, and bad policy are all going to make our …

The International Energy Agency is comprised primarily of EU countries, as well as the US, Canada, Japan, Korea, Australia, and New Zealand. As part of its function, it prepares an annual report that peers into the future of the energy market. Its latest take on things was introduced Wednesday in London. Although some of its predictions have been toned down in light of the current economic slowdown, the report concludes that it's going to be extremely difficult and expensive to ramp up fossil fuel production to meet our needs, meaning the era of cheap oil really is over.

The report is a 585-page monster that looks ahead at how energy markets develop out to 2030. A couple of major messages stand out. The first is that the energy demand in the industrialized nations of the IEA are expected, through increased efficiency measures, to largely stabilize. Unfortunately, China and India alone are expected to account for about the same amount of energy that IEA members currently use; the rest of the world will require an equal amount. The net result is a 45 percent increase in demand by 2030—down a bit from last year's estimate, but still pretty substantial.

The world, as a whole, would love to meet that demand with oil, but doing so is going to be essentially impossible. Tracking production trends of existing oil fields shows that the average yield is dropping by nearly seven percent annually, and that trend is likely to accelerate over the coming years. Offsetting this decline will require a staggering amount of new capacity: "Even if oil demand was to remain flat to 2030, 45 mb/d [million barrels/day] of gross capacity—roughly four times the current capacity of Saudi Arabia—would need to be built by 2030 just to offset the effect of oilfield decline."

We are aware of oil reserves that can get us there, but the infrastructure to tap them is neither cheap nor easy to build, and usually requires several years of advanced planning. "The gap now evident between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010," the report states. This means that our margin for error for maintaining sufficient production will get increasingly narrow. Any sort of problem that disrupts this growth in infrastructure—political, geological, financial, or anything else—is going to kick off another oil shock. Oil is not only going to keep getting more expensive, but it's going to be prone to many more of the sort of radical price swings we've seen in the past year.

All of that gets expensive. The IEA expects that it will cost over $26 trillion to meet the energy needs of 2030, over a full percent of the global GDP. Over half of that is going to go to simply maintaining the current infrastructure we have in place.

One result of this is that countries will start looking further down the energy food chain to make up for the oil that they can't get ahold of, which has some seriously unpleasant consequences. Oil substitutes like tar sands require far more energy to extract a single unit of fuel, and this adds to the expense and decreases the efficiency when they're used. The other problem is that the IEA expects that coal use will shoot up, which is problematic because that produces a lot more carbon dioxide per unit of energy when burned. The report reflects this by assuming we're going to have to figure out some form of carbon sequestration by 2030.

One thing that becomes clear when skimming the report is that many non-IEA nations have some seriously perverse incentives built in to their energy economies. Energy-rich nations heavily subsidize the cost of energy to their citizens, essentially providing little incentive for efficient processing of energy resources or efficient domestic energy use. The same thing goes for rapidly industrializing nations, which means that the facilities they are building are likely to be drains on the energy system for decades to come. These subsidies will ultimately act to ensure that we burn through a limited resource that much faster.

The report is blunt about the environmental impact of this growth, emphasizing the high end of the IPCC climate projections for dramatic effect. To stabilize atmospheric CO2 levels at 550 parts-per-million, we'd have to start lowering emissions by 2030; the IEA estimates that doing so would cost over $4 trillion, most of it borne by consumers who pay for energy-efficient cars, housing, etc. Of course, the cost of the energy saved would be nearly double that total. To stop things at 450ppm, the cost would be just over $9 trillion, and emissions would need to start dropping by 2020. The IEA says that there's simply no way for its member states to achieve that, even if they stopped all CO2 emissions. Global low-carbon energy use would have to double, reaching 26 percent of the energy mix by 2030.

But, even if you discount the environmental issues entirely, the report is anything but comforting, as it foresees a future where the energy market is severely constrained and prone to sudden upsets. "Current trends in energy supply and consumption are patently unsustainable—environmentally, economically and socially—they can and must be altered," said Nobuo Tanaka, the IEA's executive director. Unfortunately, he has to hope that the nations that don't belong to the IEA listen to his message.